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What made the Chairman of the NBU take the pen. 

On May 30, the NBU Chairman published a large “program” column under the headline “Financial and Economic Policy in Wartime. Moving On to New Stage with Focus on Economic Recovery”.  

According to Mr. Shevchenko, maintaining the current “manually controlled” mode of managing the financial system threatens to increase economic imbalances and the risk of an inflationary and devaluation spiral. Under the current model, owners of large assets will make a profit at the expense of the “ordinary Ukrainian”, who, due to his/her dissatisfaction with the situation, will choose emigration as an alternative.  

The Chairman of the National Bank believes that “returning to the market principles of financial and economic system management, important elements of which are an acceptable budget deficit with market-based sources of funding”, can prevent the negative developments.

If we ignore the details of the problems, quoting classics and apocalyptic predictions, it is easy to see that the NBU Chairman is trying to convey one simple idea to the society: the Ministry of Finance is responsible for all current and future problems and it is the Ministry that should solve them.

Inspired by allegorical images from the column (about cats and potato), its main message can be described by a famous Ukrainian proverb about the daughter-in-law as the cause of all troubles.

The thesis about the need to return import taxes is not fundamental (in the context of the publication of the Chairman of the NBU), as the Ministry of Finance takes a similar position on this issue.

The main purpose of the column is to once again blame the Ministry of Finance for low rates for government issued bonds.  

Mr. Shevchenko writes: “The Ministry of Finance is maintaining the yield on hryvnia government issued bonds at a low level, which falls short of covering inflation, stimulates consumption (i.e. increases inflationary pressures), and incentivizes the flow of savings into foreign currency (increases depreciation pressures)”.

No more and no less. According to the NBU Chairman, inflationary pressure is increased not by war, supply chain disruptions, fuel shortages, etc., but by low yields on government bonds.

Although the NBU’s Inflation Review in April literally states that the main factors in accelerating inflation were supply chain disruptions, increased costs of doing business and the loss of companies’ assets to the destruction wrought by Russia’s full-scale war against Ukraine, unevenly distributed demand and supply of goods across regions. There is no word about the low profitability of government issued bonds.   

According to the author of the column, to solve problem No.1 (dollarization and withdrawal of savings from the financial system) “first of all, the Ministry of Finance should increase the yield on hryvnia government issued bonds. (…) The current growth rates of consumer prices (16.4% in April and about 17% in May, according to the NBU estimates) and the forecast growth in consumer prices (20% + by the end of this year) should remain important benchmarks for determining the necessary yield”.        

The NBU Chairman believes that this will indirectly contribute to the growth of interest rates on deposits.

Really! And why have interest rates on term deposits of individuals been lower than the yield on government issued bonds since the end of 2020?

This is indeed an anomaly, which indicates serious shortcomings in the transmission mechanism of monetary policy and requires thorough explanations from the NBU.        

The NBU’s calls to intensify “market” sources of financing the budget deficit by increasing rates on government issued bonds twice are unacceptable for several reasons.

First, borrowings on market terms during the acute phase of the war are a priori impossible. Even the dream of 20% + for government issued bonds (which the NBU has been “requiring” for more than a month) is unlikely to cover the full range of risks caused by the war with such entity as Russia.       

Second, none of the “ordinary Ukrainians”, who the NBU Chairman cares about so much, is interested in doubling the cost of public debt service. The reason is trivial – the “ordinary Ukrainian” has no savings in government issued bonds.

Third, it is the NBU, not the Ministry of Finance, that can most effectively encourage banks to invest in government bonds. The recipe is simple, it is to lower the rate on certificates of deposit. And this is just a market lever in the arsenal of the National Bank.

And it is no secret that the NBU (if it wants) can apply to banks other, less market, methods of encouragement …

Investments in certificates of deposit (excess liquidity of banks) almost doubled during the war and amount to UAH 190 billion. This is the hryvnia resource that the Ministry of Finance can count on when placing government issued bonds.

To prevent any manipulation, it should be emphasized that in the conditions of a fixed exchange rate, the National Bank of Ukraine has no arguments to maintain the pegging of interest rates on certificates of deposit to the key policy rate.

In early May, NBU Deputy Governor Sergii Nikolaichuk said in an interview (published on May 26):

“From the first day of the war, we realized that we could not continue our monetary policy on the basis of market mechanisms and inflation targeting, when the main tool was the key policy rate. During the war, many parts of the monetary transmission simply did not work. We had only one tool to meet the expectations of the population and business – to fix the exchange rate”.

Golden words!

However, having fixed the exchange rate, one needs to maintain it. As they say, in for a penny, in for a pound. This is what (not the yield on government issued bonds) determines whether the inflation and devaluation spiral will occur or not.

But the NBU has problems with the ability to maintain the rate at the declared level.

Hardly had the NBU Chairman dreamt (for unknown reasons) of returning to the floating exchange rate (on May 15), when the exchange rate on the shadow market in a few days fell by 9% to 37.54 UAH per dollar (May 19).

On May 20, Mr. Shevchenko had to clarify that a return to a floating exchange rate was possible if a number of preconditions were met (including stabilizing export earnings), but time has been lost. As well as 9% of the welfare of “ordinary Ukrainians”.

The lifting by the National Bank of Ukraine from May 21 of restrictions on the exchange rate in the cash market against the background of maintaining restrictions in the non-cash market segment has caused a flurry of criticism from exporters (including the IT sector). And it is not yet clear how it will end.

That is, the National Bank of Ukraine seems to have other things to do but to teach the Ministry of Finance how to set the yield on government bonds.     

However, may all these articles/interviews/columns be elements of an information-psychological operation to divert attention from own failures?  

Since it is difficult to find other explanation for such provocative information activity of the NBU. If one authority has any disagreement with another authority, it is possible to turn to an arbitrator (such as the President) and find a compromise solution. Why to make it all public in a state of war?   

Although it is possible that the war has taken second place for the management of the NBU. Not without reason the Chairman of the NBU openly writes that “economic incentives are beginning to replace the psychological shock of the outbreak of the war and the predominance of charitable motives. Businesses are trying to maximize their profits, and citizens are trying to increase their incomes and protect their savings”.  

I wonder if there are “ordinary Ukrainians” among these citizens or only bank shareholders? Source: